Understanding Net Operating Income (NOI)
How to add value to your commercial real estate investment.
2 min read
Investing in commercial real estate can lead to increased profitability if done correctly. Determining the net operating income (NOI) of the property before signing on the dotted line will better understand if the property adds value to your portfolio.
So, what is net operating income? Net operating income (NOI) is a calculation that is used to analyze the profitability of income-producing real estate investments before adding in any costs from financing or taxes. NOI helps potential investors determine how much income they can expect from the property, otherwise known as the capitalization rate. This, in turn, makes it easier to compare different properties that potentially hold more value.
To calculate NOI, one must subtract all operating expenses incurred on the property from the revenue generated. Properties can generate revenue in many ways, including through rental income, paid parking, or laundry facilities. Operating expenses can include property management fees, insurance, utilities, property taxes, and maintenance and repair costs. The higher the revenue and fewer operating expenses, the more profitable the property is.
There are many ways one can add value to a property while maintaining operating expenses. This can include adding amenities to the property to justify lease rates, renovating the property's exterior to improve appearance, and leasing units at fair and current market rates.
Determining your NOI before investing in a property will reveal whether owning and maintaining the property is worth the overall expense. Suppose you are looking to invest in commercial real estate. In that case, it is important to consult with a professional to determine whether a property is a right fit for you and your business.
References
Kenton, W. (2022, February 8). NET operating income: What you need to know. Investopedia. Retrieved May 3, 2022, from https://www.investopedia.com/terms/n/noi.asp#toc-what-is-net-operating-income-noi
What does it mean to "add value" to a commercial real estate investment? First National Realty Partners. (2022, January 27). Retrieved May 3, 2022, from https://fnrpusa.com/blog/what-does-it-mean-to-add-value-to-a-commercial-real-estate-investment/
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